OEMs and Tier 1s prepare for China uncertainty, disruptions

10-Jul-2016 08:01 EDT

Chinese exports could be well below the government’s predictions of 3 million, analyst Ashvin Chotai (right) said during the 2016 Global Automotive Forum.

As headwinds buffet China's economy, automotive OEMs and Tier 1s are expecting many changes in the near term. At the recent Global Automotive Forum in Chongqing, experts predicted that slower annual growth is “the new normal” for the region’s auto industry and may cause some major disruptions.

“China’s growth is coming down to lower levels, it’s different managing for 0-5% growth than for 15-20%,” said Frank O'Brien, Executive Vice President, Asia Magna International. “Characteristics of a slow growth era are increased competition, more acquisitions and more bankruptcies. Many of the challenges now will be more similar to what’s been seen in North America and Europe.”

Even in the new normal, China’s gross domestic product is expected to grow at significantly higher rates than most regions. Segments like luxury cars remain quite strong.

“A 6-7% growth rate from the second biggest economy is good,” said Hubertus Troska, the Board of Management Member at Daimler who’s responsible for Greater China. “Mercedes Benz sales grew by 35% here, surpassing the U.S. market. Two thirds of the cars solid in China are made in China.”

Many global Tier 1s are focusing on China for future growth.

“China is our first country worldwide,” said Edouard de Pirey, President of Valeo China. “Chinese car manufacturers represented 20% of sales last year but they’re 40% of our orders.”

Chinese OEMs have long discussed exports as a major growth opportunity, but those efforts have largely failed. The fragmented local market is one of the factors that’s prevented China’s automakers from expanding globally.

“There’s talk about China reaching an export level of 10%,” said Ashvin Chotai, Managing Director, Intelligence Automotive Asia. “That’s still a question. One problem with exports is that no leading brand is the Chinese National Champion. It will be difficult to get to 3 million units by 2020, it will probably be closer to 1.5 or two million.”

While China’s rapid economic growth is slowing, central planners expect solid growth in the automotive industry, particularly so-called New Energy Vehicles that use alternative power such as batteries and hydrogen. The Five Year Plan completed in 2016 predicts that auto production will hit 28-30 million by 2020. However, a slowing economy may hamper domestic sales and government support could diminish due to debt loads.

“China has recognized that the auto industry is not drive by the five-year plan, it’s driven by markets,” Chotai said. “The government is planning on 6.5 % GDP growth through 2020. In my opinion, that will be hard to do. One big concern is the growth of the national debt. That may put a cap on GDP growth. It’s certainly a headwind.”

Central planning has caused headaches for some companies. China’s market is very fragmented, with many OEMs, so suppliers find it difficult to predict their demands. This complexity, combined with the pressure of preparing to meet central plan goals, led to overbuilding by many suppliers.

“We’re struggling with overcapacity,” said Wilson Ni, Vice President at Asimco, a powertrain components supplier. “We were asked to build up capacity for three million trucks, but last your only 550,000 were produced.

Many production facilities are still moving from construction to full operation. At the same time, the slowing economy may hamper demand while output is still growing.

“Excess capacity is a huge problem that will only get worse,” Magna's O'Brien said.

Some of this overcapacity can be attributed to the role of the government. Subsidies have helped some companies keep their production from failing. The government’s ownership role has fostered complacency and stifled innovation, according to a plenary speaker at GAF.

“The state-owned enterprises have been inefficient, they need to change,” said Gao Xiqing, Cheng Yu-tung, Chair Professor, Tsinghua University School of Law. “If state-owned enterprises are protected and don’t innovate, we’re opening the door for international competitors.”

As the Chinese economy slows into what’s often called the new normal, vehicle sales are fluctuating wildly. That’s making it tough for companies to discern business direction and make strategic plans.

“Growth has been very volatile, and that will continue,” said Ralf Cramer, CEO of Continental China. “Last year the auto industry lost 34% in one month and jumped back 78% in a month later in the year.”

There may be some consolidation in the next few years, some GAF speakers said. Many noted that quality has been an issue that slowed exports, so it will play a key role in future sales.

“We think some Chinese OEMs will win, some will disappear,” de Pirey said. “The winners will succeed by improving the quality of their cars.”